The Government is moving ahead with a second Mt Victoria tunnel for Wellington and light rail running from the central railway station to Island Bay as its "preferred choice".
Upgrades will also be made to improve traffic flow at the Basin Reserve, which involves the extension of the Arras Tunnel.
The package is estimated to cost $7.4 billion in 2030 dollars.
This morning Finance Minister Grant Robertson and Transport Minister Michael Wood outlined the long-awaited decision on Let's Get Wellington Moving's (LGWM) big projects.
The second Mt Victoria tunnel will have two lanes for vehicles and two lanes for public transport. The existing tunnel will be transformed into one for walking and cycling.
It means there will be no additional lanes for cars through Mt Victoria.
Light rail to the city's southern suburbs was preferred due to the route's potential for new housing. The route will run from the railway station, via the waterfront quays, Kent and Cambridge terraces, the Basin Reserve, and Berhampore.
Robertson said this was a once-in-a-generation opportunity to shape Wellington's future, align transport and urban development, and help address the climate crisis by moving more people with fewer vehicles.
"Light rail will support more people living centrally, close to where they work, study and live their lives," he said.
Up to 80,000 more people are expected to be living within the city limits by 2050.
There will also be bus priority out to the eastern suburbs via dedicated bus lanes. The existing bus tunnel will be retained for local bus services.
Today's announcement marks a significant milestone for the multi-billion-dollar project that has a reputation for anything but moving.
It is more than three years since then Transport Minister Phil Twyford "announced" the LGWM package.
Since then, a scathing review found the project was at risk of failing, the public has been consulted on four more options, and mass rapid transit is no longer about getting to the airport.
Following today's announcement, a detailed business case will be carried out with the expectation this will be completed by 2024.
Other LGWM partners, including the city and regional councils, will also need to agree on the plan for that work to progress.
Wood said given the scale of the project, this business case would also consider the alternative option of bus rapid transit along the light rail route.
"This is a prudent step to take and ensure we can maintain momentum on the project."
Earlier this month the Herald reported the regional council had raised concerns about whether uncertain housing development forecasts could be relied on to justify light rail along the route.
Today's announcement confirms these concerns have been considered and an "off-ramp" has been built into the preferred option via bus rapid transit as a potential alternative.
It means the light rail at the heart of the scheme could be converted to cheaper bus rapid transit if the dwellings along the route and Wellington's growing population failed to justify a more costly, but more efficient, light rail.
Regional council chairman Daran Ponter said the announcement provided flexibility around the mode of transport needed to meet Wellington's urban growth in the future.
"Regardless of which of the two modes eventuate, this carbon responsible future aligns closely with Greater Wellington's existing plans and compliments Metlink initiatives such as electrification of all buses by 2030, electronic ticketing, and transport on demand services. "
Mayor Andy Foster said it was a "massive day" for Wellington.
"Committing to a second tunnel and a clear plan for sorting out transport around the Basin Reserve are important, long-awaited stakes in the ground.
"Important too is signalling of further detailed investigations into urban development assumptions along the confirmed MRT (mass rapid transit) route."
Meanwhile, the Government has asked for options to fast-track progress and early works on its preferred LGWM option, with consideration to phasing options, Wood said.
"The data tells us that the costs of delaying this project for another decade will only see costs increase. Wellingtonians recognise the need for this investment, they want us to get on with it, and we are."
Other LGWM projects already underway include removing vehicles from the Golden Mile.
This will mean wider footpaths, dedicated bus lanes, and a safer and more pleasant place to walk, shop and dine.
Construction has started on a pedestrian crossing on State Highway 1 at Cobham Drive, after Wellington Airport dropped a legal battle opposing it.
Work on small intersection improvements in the central city has also started to make it easier for pedestrians to cross, and get to and from the waterfront.
In response to today's announcement, the Green Party called on the Government to complete light rail and improve walking, cycling, and bus journeys before digging a second tunnel.
Transport spokeswoman Julie Anne Genter said the Government's preferred option was not best for the climate overall.
"The tunnels will be high-carbon and high-cost, and could also delay the delivery of safe walking and cycling to the east.
"Successive Governments have been stuck in the same old mind-set of trying to reduce congestion by building another expensive bit of road – and it seems this Government is thinking the same way."
Genter said the additional tunnel would have a "tiny effect" on travel times for cars because congestion would just be pushed to the next bottle neck.
National's transport spokesman Simeon Brown said light rail was an ideological preference that didn't stack up and described the situation as "Auckland light rail 2.0".
"Labour might have proposed a 'four-lane tunnel', but the reality is that two lanes will be for buses only, leaving only two lanes for general traffic – no different to the current situation, which is the cause of significant congestion and delays.
Brown said the route between Miramar and Wellington CBD should have four lanes for general traffic.
On the existing Mt Victoria tunnel being converted into one for walking and cycling, Act leader David Seymour said the country could not afford to take existing infrastructure and "massively reduce" its capacity.
Seymour said Wellingtonians wanted to have four lanes as part of the $7.4 billion investment.
"Eventually you'll have to have cars through the Mt Vic tunnel because 58 per cent of Wellingtonians drive to work and they simply will not be able to sit by and watch a tunnel that's effectively unused."